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Welcome to the Clay & Company Blog

Clay & Company is a Houston-based commercial real estate auction, brokerage and investment company serving the needs of governmental agencies, financial institutions, insurance companies, and individuals throughout the State of Texas since 1991.

Our regularly updated blog covers local and national news, events, and happenings affecting Houston commercial real estate.

A synopsis: No More Fear and Loathing of CRE Lending for Banks from CoStar

Below is a synopsis of this article by Mark Heschmeyer of CoStar

Five Years After the Onset of the Great Recession, Banks Are Ready To Venture Back in to Commercial Real Estate

  • costar-logo-colorFor the first time in five years, a majority of banks are finally talking about their ability to grow their loan portfolios.
  • Up until the fourth quarter of 2011, non-performing commercial mortgage and construction loans were still increasing notably. And indeed, for many banks, they are still going up, but at moderating rates. So there is still a note of caution from bankers.
  • “Because the financial condition of many of our borrowers has suffered over the last several years, we expect to continue to see downgrades within the portfolio into an extended recovery as a play,” said Daryl D. Moore, executive vice president and chief credit officer of Old National Bancorp. “This will be especially true in the commercial real estate portfolio where capital and liquidity continued to be an issue for many of our clients.”
  • Some banks are still being aggressive in charging off some loans, particularly construction loans, and are trying to sell off their foreclosed real estate inventory and nonperforming loans as best as they can.
  • However, in the Federal Reserve Board’s latest Senior Loan Officer Opinion Survey issued this week, U.S. bank loan officers reported that demand for CRE loans had strengthened, on net, over the past three months. In addition, during the past 12 months, on net, domestic banks reportedly eased maximum CRE loan sizes and many domestic banks trimmed loan rate spreads.
  • “Through 2011 obviously we’ve all been very cautious in that sector due to some of the challenges that have been experienced,” said Claude Davis, president and CEO of First Financial Bancorp. “Where we’ve seen our new opportunities are really with those investors who have weathered the storm well, had the liquidity and the cash and the capacity to kind of grow and expand if you will, kind of win assets at a cheaper level. And so we’ve actually seen the quality be very good from our perspective in that book.”
  • Banks are still staying away from the high risk areas like residential development.
  • Philip Flynn, president and CEO of Associated Banc-Corp., said, “We continue to see opportunities for growth and expansion in CRE lending because of the retrenchment of other competitors and other sources of capital.
  • While it is apparent that the growth in commercial real estate lending will be limited and cautious, the timing for an improved lending environment couldn’t be better for some investors who financed at the peak of the market five years ago. As mortgage production ramps up, investors will see banks being more competitive on pricing.
  • The bad news is that, initially, it will be the well heeled who stand to benefit first and financing terms are likely to be fairly tight. Banks will also use the opportunity to restructure the makeup of their portfolios – weeding out the less creditworthy.
  • At CVB Financial Corp., Christopher D. Myers, its president and CEO, said most of the deals his bank is doing are pricing in the 4.5% to 5.25% range — unless the bank does an interest rate swap. Then typically the bank is pricing CRE loans somewhere around 3% on a variable rate.
  • In general, bank executives said they would be targeting the strongest growth in particular assets and markets. Multifamily was most frequently mentioned as a targeted asset category as were some select middle-market industry segments such as, restaurants, health care and energy.
  • By market area, Bank of the Ozarks Inc.’s George Gleason, chairman and CEO, said, “I think the largest part of [our] growth is going to come from our Texas offices. The second largest part of that growth I would expect to come from our metro Little Rock, [AR], area offices and the third largest part of growth I would expect to come from our metro Charlotte [NC] office.”
  • In the last quarter Bank of the Ozark’s Texas office had accounted for 41.8% of its total loan portfolio.
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Increasing Seller’s Property Value

We wanted to share the below article form Yahoo about Increasing a Seller’s Property Value. Some of it is directed at residential real estate but many of the same perceptions apply to selling commercial real estate as well. Many improvements like these are important to make before putting your property on the market for sale or lease.

Understand first of all that there IS a difference between price and value. Price is the amount you are asking for the property. Value is buyer perceived, and this perception of value is influenced by many factors such as location, features, condition, comparison to other purchase option, etc. By attending to details that can have a positive impact on the value, sellers can significantly increase their chance of attracting qualified buyers willing to pay the asking price.

Some tips to achieve a positive impact on value are:

  1. Perceived size impacts value, even more so than actual square footage. Open floor plans make a room feel bigger than larger spaces with smaller rooms. Showing property that is furniture free, or at reduced clutter, helps to make the space feel bigger.
  2. Vacancy increases sale-ability. Property is easier to show and easier to sell, and quicker to take possession of when it is vacant at the time it is offered for sale. Evidence of problems to take possession of the property — such as encroachments, or tenants who wont allow buyer tours — negatively impact value. Vacancy also helps the buyer walk through the property imagining ownership. Sellers should remove personal trinkets and family pictures as well as being conveniently absent during a buyer tour.
  3. Cosmetics are important.
    Fresh paint will always add more value than it costs.
    Clean or new carpet/flooring adds more value than it costs.
    Landscaping adds more value than it costs. At the very minimum, make the entrance area neat.
    If you can, add some colorful flowers and new sod.
  4. Take care of the obvious! The spot on the ceiling from the roof leak takes thousands of dollars from the perceived value and the offer price.
  5. Condition affects value. Do a seller’s home inspection to identify and fix the problem BEFORE closing. No point holding up your check a few extra days; plus a failed buyer’s inspection could cost you the sale. Buyers will often bargain down your asking price to accomodate for property condition and repairs.
  6. If you can, remodel/update the kitchen and master bathroom. These two areas have a big impact on home buying decisions.
  7. Strategic renovations impact value and your bottom line. Don’t spend more money to renovate the place than you can recapture in value on the sales price.
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Defining the type of investor you are…

ClaycoTotalSafety

Investing in commercial real estate is a great way to generate wealth producing relatively consistent returns through monthly income or capital growth

Real estate returns are generated in two ways: income return and capital returns. The income returns comes from tenants’ rent payments and the cash that remains after all property expenses have been paid. Capital returns are the increase or decrease in the value of the property due to changes in market demand and/or inflation.

The first steps to investing in commercial real estate is to ask yourself why you want to invest in real estate and to define what type of investor you want to be. What kinds of returns are important to you?

An investor that is interested in income return, or stable cash flow, purchases a property that can provide a monthly income. The income return from real estate is directly linked to the rent payments received from tenants, minus the costs of operating the property and outgoing mortgage/financing payments. Analyzing this type of property has been likened to the analysis you may do if you were to buy a business. This means thoroughly examining the financial records of the property to prove it could stand on is own each month. Also important is the property’s ability to stay leased so that these financials remain.

When investing in a single-tenant office or industrial building this may mean you evaluate the current tenant more completely to be sure they intend to and can afford to continue leasing the building. For a multi-unit property, the strength of the leasing market and competitive rates of the property are more important.

One of our clients that favors triple-net investments recently reviewed the real estate deals he had participated in over the past couple of years. He found he was getting 9.4% return on cash and pointed out that the internal rate of return was even greater in that you are also reducing debt.

Sign photo 2

Unlike cash-flow investors, long-term or “hold” investors rely on capital returns through real estate appreciation to build their wealth. Capital appreciation of a property is determined by whether or not your property would sell for more than you bought it for. If so, then you’ve achieved a positive capital return. These investors rely on the simple strategy of patience. They look for real estate that will appreciate over time because of location, market changes, or inflation, or deals that provide an upside by offering the ability to increase cash flow or update the property.

The capital return is more difficult to calculate, and requires the property to be valued or appraised. The majority of the volatility in real estate returns comes from the capital appreciation component of returns. Income returns tend to be fairly stable. Capital returns fluctuate more and although this tactic can be riskier, many times the return is greater.

While you are out in your city, start looking at the real estate you see – from the retail center at the corner to the industrial building by your office to the vacant land by your house. Is the shopping center fully leased? What kinds of tenants occupy the buildings? An investor owns every one of these commercial properties.

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Specialty REITS analyzed by The New York Times

An interesting article published in The New York Times about specialty investments like cell towers and data centers.
By Alison Gregor

Real estate investment trusts, or REITs, have largely outperformed other investment vehicles in the sluggish economy of the last few years. But one subset — “specialty” trusts that invest in real estate other than the four major groups of office, retail, residential and industrial — has been exceptionally solid.

Such trusts that fall into the specialty category can have trouble attracting investors, who often perceive them as being risky, real estate experts said. Typical investment assets are cellphone towers, cold storage warehouses, or transportation and energy infrastructure, among other things.

“What we’ve seen is these specialty or noncore property types have actually done pretty well this year,” said Steve Shigekawa, a co-manager of the Neuberger Berman Real Estate fund, which has about $378 million under management and has invested in several unusual REITs, for timber, self-storage properties and data centers. “You’ve seen pretty consistent demand, and growth in net operating income has actually been better than in the more traditional sectors.”

While the Dow Jones U.S. Real Estate Investment Trusts index shows a year-to-date total return of 3.32 percent, the Dow Jones U.S. Specialty REITs index shows a return of 7.94 percent.

Markets that drive the demand for assets of the specialty REITs tend to be different from the four core trust classes, which can make some of them particularly good investment opportunities in tough economic times, real estate experts said. Self-storage businesses, for example, are obvious beneficiaries of the increase in housing foreclosures and the downsizing of American homes, said Stacy Chitty, a managing partner at Blue Vault Partners, a Georgia company that tracks the performance of public nontraded REITs.

Another sector is data storage centers, which are growing because of increased Internet usage, which seems to be recession-proof. Mr. Chitty mentioned mortgage and real estate-related debt instruments and health care assets as other areas that could flourish in the coming year despite a poor economy.

Entertainment Properties Trust, a REIT that invests primarily in megaplex theaters, has benefited from a shift toward inexpensive entertainment in hard economic times. “Theaters have tended to be a touch countercyclical — not wildly, but a touch,” said David Brain, the chief executive of Entertainment Properties Trust, “and that proved itself in this most recent recession” in which 2009 was a record year for the trust. The REITs lumped together into the specialty basket are actually a diverse group of companies with unusual lines of business that can provide singular opportunities for investors, real estate experts said.

While the National Association of Real Estate Investment Trusts no longer has a “specialty” category, it places some of the more unusual trusts into a sector called “diversified,” said Ronald C. Kuykendall, the group’s vice president of communications.

Some REITs considered specialty in the past, like those investing in self-storage properties, health care assets and timber, have become individual sectors in themselves, Mr. Kuykendall said.

“If a sector gets large enough that it has a significant enough market capitalization, like timber REITs or self-storage, that becomes a sector,” Mr. Kuykendall said, rather than falling into the “diversified” class.

Breaking out of the specialty category has been a boon for the self-storage trusts, said Clint Halverson, a senior director of investor relations for Extra Space Storage Inc., a real estate investment trust based in Salt Lake City, said. The four self-storage REITs now have an equity market capitalization of $27 billion.

“Whereas before when we were lumped into specialty,” he said, “you had to market your brand more to investors. It was a little bit more work to get your name out there, and you had to clarify the story and help investors to understand the value proposition in your stock.”

Because REITs that invest in real estate outside the mainstream are often structured differently from traditional ones, financial planners and institutional investors have more research to do in formulating their real estate portfolio strategies. For example, specialty trusts often have an operating business linked with their real estate assets, said Thomas M. Ray, the president and chief executive of the CoreSite Realty Corporation, a REIT that invests in data centers based in Denver.

“Many of the specialty REITs have more of an operational component to them than the traditional four food groups in real estate,” Mr. Ray said. “Because that operating component is so much more important and larger in many of the specialty sectors, then expertise and specialization matter.”

For instance, CoreSite acquires, builds and operates data centers, which house the huge servers necessary to store data for businesses with growing Internet needs. Those unfamiliar with operating these types of businesses might have difficulties predicting the cash-flows of a business doing so.

A lack of consistent and long-term performance measures and the small size of some of the niche markets also can make specialty REITs harder to grasp for investors, he said.

“More of the specialty REITs came on the scene in the last 10 years or so,” Mr. Ray said, “so you have newer products in these specialty REITS that people need to get to know better, and I think that process is still under way.”

But for the data center REITs, a growing track record is helping overcome investors’ lack of experience and misgivings regarding the riskiness of the nontraditional real estate sector. Of the three data center REITs, with a total equity market capitalization of about $8 billion, two are well north of $1 billion, and “that is somewhat of a bright line for some large institutional investors,” Mr. Ray said. “Some investors say, ‘If you’re less than a billion, it’s harder for me to get the size of position I want and harder for me to move in and out of the stock.’ ”

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Houston Business Journal: Commercial Real Estate Outlook

Today Houston Business Journal’s Commercial Real Estate Outlook was published:

Houston’s outlook continues to offer more options than the rest of the country in regards to businesses and job seekers alike, say local economic and development experts.

Most parts of the city have seen continued growth throughout 2011, and that momentum is not expected to slow down. The Houston metropolitan statistical area will add about 84,600 jobs this year, up from about 80,000 jobs added in 2011, according to the Greater Houston Partnership.

The Houston Business Journal has identified six Houston submarkets that experts expect to be active in 2012 — Downtown, The Woodlands, East End, Uptown, North and the Energy Corridor. Below is an excerpt about each area. Click on the submarket name for more thorough information.

North Houston
houstonexxonmobileWith many large corporations, including ExxonMobil moving or expanding to North Houston, we should expect to see land sales and spec construction increase this year. The corridor is appealing because it offers more available shovel-ready land, nearby residential, a strong labor pool, amenities and transportation. This aerial photo shows the new Exxon Mobil campus site under construction at I-45 North and the Hardy Toll Road. Photo Source: Brian Kennedy, www.birdseyehouston.com.

The Woodlands
The Woodlands continues to be a boon for energy companies drawn by Exxon Mobil’s planned corporate campus near the master-planned community. The demand for office space in the submarket — and the desire to be near Exxon — puts further pressure on the Class A office market. This growth should also positively affect the retail market.

Energy Corridor
Despite the exodus of energy companies flocking to The Woodlands, the Energy Corridor is still appealing to firms of its namesake. Dallas-based Trammell Crow Co’s purchase of 18.8 acres from the Texas General Land Office at the southwest corner of Interstate 10 and Eldridge for future development proves continued interest. Sources told HBJ last year that Trammell Crow anticipates doing a multiphase office campus, with construction starting in 2012. Besides office construction, growth in the multifamily industry in the corridor is focused on lifestyle and creating walkable communities.

Uptown
This link on the HBJ website was not working so we will update it when it become available.

Dynamo_StadiumHoustonEast End
The Houston Dynamo’s opening game and the debut of the new BBVA Compass Stadium will occur on May 12, and with it comes an expected surge of people to the east side of the city. The 22,000-seat, open-air stadium will be a boost to growth and development on the east side of Interstate 59 downtown. Also promising for the area is the “Building a Better Houston” campaign, established between the Dynamo and BBVA Compass, which will focus on revitalizing Houston’s East End, among other initiatives. Rendering of the new Dynamo Stadium. Photo Source.

Downtown
Vacancy rates are expected to drop into the single digits this year due to rapid demand in the heart of the city, sending rental rates soaring. Last year saw the entrance of two new office buildings, Hess Tower and BG Group Place, (about 1.9 million square feet combined) and they sit at . 100 percent occupancy and 70 percent occupancy, respectively. Several new buildings have also designed, but are on hold until tenants can be secured. There are no large retail projects planned to date and any hotel projects are at the beginning stages. The addition of a free bus service on a 2.5 mile loop around downtown also will contribute to changes downtown. The contemporary-designed shuttle will connect workers, hotel guests and residents to the George R. Brown Convention Center, shopping and other amenities in the area. The Greenlink Circular Transit is set to start its first route in May.

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Houston Through the Years

Via culturemap:

When we asked you to show us your best Houston photos to commemorate Houston’s 175th birthday, we had no idea you were just as in love with the city as we are. And we certainly learned one thing in picking the best photos for our contest: There’s nothing like seeing the Bayou City from the eyes of a Houstonian.

Houston CityPhoto by James JacksonHoustonSkylineEmile Brown
BayouSculpturesHoustonJulie Gomez
TanscoTowerHoustonKyle Jones
HoustonGoodeCo
Jim Goode

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Self-Rental Rule and Taxes

Below is a valuable article on self-rental properties and the tax consequences. The article was written for CCIM by tax manager, Daniel Rowe, CPA, at the accounting firm Deemer Dana & Froehle LLP in Savannah, Ga.

Don’t get caught in a trap of unintended consequences.

The only thing worse than incurring a loss on investment property is incurring a loss that cannot be deducted for tax purposes. Self-rental property may cause this tax result for some property owners if rental arrangements are not strategically prepared. The following overview of the self-rental rule, including an explanation of passive activities in the context of rental real estate, may shed light for property owners who want to avoid such tax consequences.

Passive Activities Concept

The Internal Revenue Service considers most business activities to be nonpassive if a taxpayer materially participates in the business. One exception to this rule is rental real estate.

Partly because of their past use in tax shelters, rental real estate activities are generally considered passive regardless of participation level. (There are exceptions that go beyond the scope of this article.) The distinction between passive and nonpassive activities is important because under the passive activity loss rules, a passive loss usually can only be used to offset passive income. Generally, any passive loss that exceeds passive income is suspended and carried forward to be deducted in a future year. However, there is an exception of up to $25,000 for taxpayers who actively participate in a rental real estate activity. Nonpassive loss, on the other hand, can offset both passive and nonpassive income.

Self-Rental Nuances

Taxpayers can generally offset rental income from one property by rental loss from another property, as passive loss is deductible to the extent of passive income. However, an exception to this simple rule occurs when property is rented to one’s self or a business in which one materially participates. In such a case, the rental real estate activity’s treatment as passive or nonpassive varies depending on whether it produces income or loss.

For example, assume Juan has three activities for tax purposes: He is the sole owner of a bookstore, in which he materially participates, and he owns two rental properties—a warehouse and an apartment building—that are passive by nature. The activities generate $150,000 income and $100,000 loss, with a net gain of $50,000. (See Example 1.) The rental loss can offset rental income, with the excess loss then suspended. The result for Juan is $100,000 of taxable income and $50,000 of suspended loss.

But suppose Juan rents the warehouse to his bookstore instead of an unrelated third party. This is when the self-rental rules come into play to recharacterize the rental activity.

In the case of a self-rental, income is treated as nonpassive and loss is treated as passive. Thus, the warehouse income is nonpassive and the apartment loss cannot be deducted against it. Because of the self-rental trap, Juan’s tax result is $150,000 of income and $100,000 of suspended loss, as shown in Example 2.

Because he is renting to himself, Juan controls the rent that the bookstore pays. By adjusting this amount he can theoretically create a loss for the bookstore. If he increases the bookstore’s rent for the warehouse by $125,000, he will get the results in Example 3, which is $150,000 in taxable income and $100,000 in suspended losses. Again, because it is a self-rental, the warehouse income is treated as nonpassive.

The result would be the same even if Juan’s spouse was running the bookstore business. In determining material participation, participation by Juan’s spouse is considered participation by him as well. The self-rental rule’s primary purpose is to prevent taxpayers from manipulating rent for companies they (or their spouses) own and operate to create passive income to use against other passive losses.

Avoiding the Trap

Taxpayers can avoid or reduce the detrimental tax effect of the self-rental rule. One way is to reduce their participation level in the operating activity so it fails the material participation tests. Then both the operating activity and the rental activity will be considered passive and the self-rental rule will not apply. However, it is usually not feasible for owners to reduce their participation, especially when the operating activity is their primary business. The interplay of the operating activity and its income or loss with any other activities of the taxpayer should be analyzed in aggregate prior to considering a reduction in participation.

A more reasonable method of combating the self-rental rule is to minimize net income for the rental activity. A net loss will still be subject to the normal PAL rules, so minimizing loss may be important as well. However, fair-market rent must be charged, as an artificially high or low rent used to manipulate income will not withstand IRS scrutiny.

Another option is to rent from a third party. To avoid the poor tax results in Example 2, Juan’s bookstore could rent a warehouse from an unrelated party and he could rent his warehouse to another unrelated company for an offsetting amount. This method relies heavily on market conditions that allow Juan to find both a tenant for his property and his own lease space.

It’s not always easy or practical to avoid the reclassification of income under the self-rental rule. Property owners or investors who rent to themselves or their entities should be aware of the potential tax consequences that can make a bad situation even worse.

Is there anything you would like more information on? Do you have real estate questions? Let us know and we will get them answered for you.

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What every tenant should know before signing a lease

From the Houston Business Journal

Commercial-Lease-Agreement

The cheapest rent does not guarantee the best deal. Make sure your landlord is on firm financial footing. Find a qualified tenant representative to advocate on your behalf.

Those are some of the guiding principles businesses should follow before signing a lease, according to commercial real estate experts.

Committing to leasing space — whether in an office building, shopping mall or warehouse — is a major decision for any business, but one that owners and managers often make without being armed with all the facts.

The reasons vary — they are so busy running their companies that they often do not have the time to research the market and seek proposals, they have never negotiated a lease, or have only limited experience doing so.

Or, they take the word of a real estate broker who represents the landlord, not paying attention to the fact that their interests and those of the landlord are not always the same.

“They get lulled into a false sense of security,” said Eric L. Nesbitt, a real estate attorney in Denver, and author of “Negotiating Commercial Property Leases.”

“They drive around, see names and numbers on signs on buildings, call and deal direct with the landlord rep,” he said. “They have a good rapport and think they’re getting a good deal. But, at the end of the day, that agent is going to get the best deal they can for the landlord.”

The tenant may think they got a break because the landlord’s rep took 50 cents or $1 off the lease rate as a concession, Nesbitt said. But, other tenants got $2 off.

Given the relatively weak demand and excess supply of commercial space, tenants should use that imbalance to their negotiating advantage. It’s still a tenant market in retail, depending on the area one is looking to lease in, said Walker Barnett, principal with Colliers International.

However, that is not true with industrial. With a 5 percent vacany level, the industrial market is swinging back toward the landlord, he said.

To fill empty space, many landlords are offering incentives that go beyond cutting the lease rate. Free rent, whether for one month or more, has become increasingly common.

Another example is a more generous allowance for tenant improvements. Landlords pay for improvements to get space ready for tenants up to a certain amount, say $10 per square foot. If the cost exceeds the allowance, the burden falls on the tenant to pay the difference.

By offering a bigger allowance, the landlord is shouldering more of the up-front cost.

Long before negotiating a new or renewal lease, tenants should know the financial health of the property owner.

That is one of the most overlooked aspects of a transaction and one that could come back to haunt the tenant if the landlord is foreclosed upon or does not make good on promises to do renovations or other improvements.

“You have to ask a lot of questions,” said David Zimmer, national president of the Society of Industrial and Office Realtors. “A lot is relative to the size and sophistication of the tenant and the deal. Some information will be readily available.”

Zimmer suggests asking the landlord’s lender for a reference. He also said tenants should insist on a nondisturbance agreement in the lease. Under this provision, the lender honors the landlord’s lease obligations if the landlord defaults on his loan.

A nondisturbance agreement trumps a common provision in leases indicating the lease is subordinate to the mortgage or deed of trust, Zimmer said.

Nesbitt and Zimmer both recommend businesses rely on a qualified tenant representative to find the space that fits their needs and negotiate the best lease.

There is no extra cost since a tenant’s representative splits the commission with the landlord’s broker, an arrangement similar to what happens in residential real estate.

“We like to tell our clients that in most cases, not only are we going to work with you, you are going to save more money than if you try to negotiate on your own,” Nesbitt said.

That is not to say business owners and managers cannot find space on their own, perform due diligence on the landlord, and successfully negotiate a lease.

“Is it possible? Of course,” said Frank Simpson, 2011 president of Certified Commercial Investment Member Institute.

“It’s possible for a lay person to operate on himself but you really need a surgeon to do it. Why would you not want to use a qualified broker? You’re busy. You’re selling widgets. You don’t know the pitfalls, you don’t know the opportunities that the market is allowing in this climate.”

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Learning Real Estate Terms: Escrow

Escrow: A neutral third party holds the documents and money involved in a real estate transaction and ensures that all conditions of a sale are met.. Escrow also refers to a special account that a lender establishes to hold monthly installments from the borrower

Here’s a quick rundown on the term escrow from Yahoo Real Estate and The Lending Tree

If you’ve ever made an informal bet with a friend, you may have asked a third person to hold the money until the wager was resolved. When you take out a mortgage to buy a home, you’re doing something similar by opening an escrow account.

How it works

When you put money in escrow it is held by a neutral third party (called an escrow agent) who works for both the lender and the borrower. The agent’s role is to carry out the instructions agreed upon by both parties. The money is released when all the terms of the agreement are met. Escrow can be involved in anything from multimillion-dollar building projects to purchases made on online auction sites.

When it’s used

When your mortgage closes, your lender will usually require you to open an escrow account to cover property taxes and homeowner’s insurance. You’ll make an initial deposit, followed by payments to the account every month. (Usually these are added to your regular mortgage payment.) The escrow agent will then release these funds as your taxes and insurance premiums come due.

Its purpose

The idea is to protect the lender by ensuring that you pay your taxes and insurance on time. If you default on your property tax, for example, your municipality can put a lien on the house, which would make it difficult to sell. Or if your house burns down and you’ve neglected to pay the insurance, the lender would be left with no collateral.

How you benefit

Escrow can benefit borrowers by helping them spread insurance and tax expenses evenly over 12 payments. For example, assume your yearly property taxes are two payments of $1,000 each, and your insurance is $400 annually. If you paid these directly, it would mean three large payments a year; your escrow costs, however, would be a manageable $200 a month.

Escrow payments

Your escrow account will have a built-in cushion — if you miss a payment, the lender must still be able to pay your accounts on time. However, federal law prohibits lenders from requiring more than two months. expenses in escrow. And because your tax and insurance costs will change slightly from year to year, the lender will review and adjust your escrow payments annually.

When escrow may be waived

In most states, the money you place in an escrow account earns no interest for you. For that reason, many borrowers prefer to pay their taxes and insurance directly. Lenders may agree to this if your down payment is more than 20 percent, although some will raise your interest rate slightly to compensate. Once you agree to putting funds into an escrow account, however, it is difficult to cancel it, so make sure you fully understand the arrangement before your mortgage closes.

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Bisnow: 12 PREDICTIONS FOR 2012

12 PREDICTIONS FOR 2012 via Real Estate Bisnow HoustonReal-Estate-Market-Outlook-2012

1. HOTELS IMPROVE

Performance in the hospitality industry is on the up, according to Smith Travel Research and PKF Hospitality Research. Smith reports that Houston is doing particularly well; our hotels rank second in the US (behind Nashville) for year-over-year gain in room demand.

2. WESTCHASE RISES

With at least two spec office buildings slated to break ground in 2012, Westchase may just be the hottest submarket this year. Westchase District’s Sherry Fox tells us leasing volume in the submarket had topped 1M SF by Q3 ’11, well ahead of 2010 numbers. That put occupancy at 86.7% by the end of Q3, and Sherry says very big blocks are available.

3. FUNDS ARE UNPOPULAR

Ernst & Young American RE sector leader Mike Straneva (we snapped him at an E&Y/Baker Botts event in December to the right of Archstone’s Neil Bown and HFF’s Jody Thornton) says the recession taught people that they need to know who all investors are in a deal. That said, funds that do exist are attracted to RE because of returns.

4. CMBS IMPROVES, BUT IS THAT ENOUGH?

Commercial Mortgage Backed Security values will be on the rise this year: Wells Fargo Securities expects $25B, and Credit Suisse Group AG and UBS AG predict as much as $45B issued in 2012. But Andrews Myers CRE attorney Patrick Hayes has less confidence. Although Patrick has seen a resurgence of CMBS loans, he cautions borrowers that underwriting is tough to the point of being unreasonable. He suggests borrowers avoid that route unless they’re confident their properties can withstand the underwriting process.

5. INVESTORS COME TO CRE

Texas A&M Real Estate Center chief economist Mark Dotzour thinks US stocks and CRE broken deals are the most undervalued assets in the country right now. People are bound to catch on soon, making them the next investment trend.

6. AND TEXAS IN PARTICULAR

Houston and Dallas are among the top CRE hot spots (NY and DC are the others) generating investor interest, says Younan Properties chairman/CEO Zaya Younan. Foreign investors (including the Chinese and Europeans) only want to talk Texas because of its fast-growing, strong fundamentals.

7. DRIVING AUSTIN

A problem everywhere: traffic congestion. For Austin and San Antonio, the problem compounds with 70% of the NAFTA truck traffic making its way up I-35. But, that also means opportunities, too, according to the experts at the Bisnow Future of the I-35 Corridor in Austin yesterday. Only 80 miles apart, the two major metro areas may one day mesh into one greater MSA with a population of about four million. Major universities, international airports, and the NAFTA superhighway are a recipe for growth between the two cities.

7. OFFICE ABSORPTION INCREASES

Houston’s office leasing market fundamentals improved remarkably last year, according to PMRG VP of research Ariel Guerrero. Office product absorbed 3.2M SF, the most since ’08. Look for a continued shift to a landlord-favorable market as rents rise and quality space options diminish.

8. CLASS-A WILL DO EVEN BETTER

Of the 3.2M SF Houston absorbed last year, 2.4M SF was Class-A.

9. HEALTHCARE’S ABOUT CLASS-B

Marcus & Millichap’s Tanner McGraw tells us investors in the healthcare space are paying more attention to Class-B product. According to Marcus & Millichap’s October report, statewide MOB transaction velocity increased 28% from the same period in 2010. Activity accelerated dramatically for buildings below 5,000 SF, and lower-quality properties were the lion’s share of deals. Tanner is also seeing more health systems building and acquiring off-campus assets through physician practice acquisitions.

10. SPECIALTY GROCERS COME TO MARKET

The retail market in 2011 was dominated by HEB and Walmart, but look for specialty stores to creep into Houston in 2012. Transwestern’s Nick Hernandez says we’ll see Aldi, Trader Joe’s, Sprouts, and others open their first Houston stores this year. And here’s two for the price of one: Nick also says we can expect retail landlords to squeeze more value out of existing centers by adding pad sites in parking lots or tacking on small buildings for additional SF.

11. SELECTED CONSTRUCTION GAINS

Expect modest gains in construction this year, according to Andrews Myers construction attorney Ben Westcott. He expects construction to increase in infrastructure, municipal, education-driven, and multifamily projects. The latter three project types will see a bump from the population spread across our fair city. This is leading to more construction jobs: The Labor Department reports that 9,000 were added in November and 17,000 in December. Plus, construction spending increased over three of the last four months of 2011.

12. INDUSTRIAL STAYS HOT

Many of the spec developments under way will deliver this year, most have significant preleasing. And that means that concessions are burning off. The team predicts they’ll become the exception rather than the rule, a nice change for landlords from the previous three years. The north submarket will be the hottest, possibly running the risk of being overbuilt.

Each number has been summarized. See more on each category HERE.

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